Sasol to convert natural gas to meet demand for diesel

South Africa’sSasol Ltd.is looking to build a multibillion-dollar plant to convert natural gas into diesel, adding another demand driver for a commodity that is taking an increasingly prominent role in the North American energy market.

On Monday, the company said it will start engineering work on plans for a $11-billion (U.S.) to $14-billion complex that will take natural gas and convert it into 96,000 barrels a day of diesel and other liquids. The Westlake, La.-plant will be, Sasol said, one of the largest foreign investment manufacturing projects in U.S. history – although it remains at an early stage, with a final investment decision still years off.

Past experience has not been kind to such plants, either, with large budget overruns elsewhere. In Canada, Sasol and Talisman Energy Inc. had worked to build a gas-to-liquids plant in Alberta. Talisman abandoned that effort in June; Sasol said in September it had selected a potential site, but acknowledged yesterday that a decision on whether to proceed with engineering for that project would be delayed as the U.S. project takes precedence.

In Louisiana, the mere promise of a massive gas-to-liquids investment was celebrated by the state, which has offered Sasol a large incentive package.

It could also have a significant impact on Canada, where natural gas production has fallen on difficult times. New plants like that of Sasol stand to stir greater gas demand – the Louisiana project alone is expected to use roughly a billion cubic feet of natural gas per day, which is equivalent to about 7 per cent of Canada’s entire average annual gas output.

“It’s huge,” said Jihad Traya, associate director North American natural gas for IHS. It is, he said, “a good thing for gas demand.”

And it comes amid a rapid gain in North American use of natural gas that is creating fundamental shifts in the energy marketplace.

According to data from the U.S. Energy Information Agency, gas demand in the first nine months of 2012 is up 10.6 per cent over the same period in 2009. In the electricity sector, year-over-year gas demand was up 24 per cent between January and August.

At the same time, major companies such as Royal Dutch Shell PLC are studying construction of multibillion-dollar plants to convert gas into chemicals.

The changes are “amazing,” said Peter Tertzakian, chief energy economist for ARC Financial Corp. The Sasol project is particularly notable, he said, because if it’s built, it will both boost natural gas demand and potentially reduce oil demand, by displacing diesel refined from crude.

“This is a direct assault on transportation fuels. Natural gas is trying to take market share away.” That fits with a broader trend: “If you look at the growth rates of natural gas globally, they’re growing faster than oil.”